Applied Rationality focuses on public policy issues and tries to take a liberal perspective that is consistent (comments to the posts will often show otherwise) with neoclassical, rational-choice economics.

Monday, October 17, 2011

Farmer Stanley

If you you thought that Wall Street's pre-crash gambling binge couldn't get any kookier, you should read Bloomberg's story on Morgan Stanley's investments in Ukrainian farm land.

Iowa native Justin Bruch marveled at the opportunity when Morgan Stanley (MS) called in late 2007 to recruit him for an unusual assignment.

The New York bank, flush with $7.5 billion in fiscal 2006 profit -- the biggest in its history -- was going to be farming 11 parcels on the steppes of Ukraine. The commodities team wanted Bruch, a redhead with meaty hands who’d been farming all his life, to manage one of them.

...Morgan Stanley gave up on farming in Ukraine in July 2009, abandoning the initiative in the middle of a harvest. It bought out its local partner, Aleksandr Mamontenko, then sold Enselco to an investment firm based in Jersey in the Channel Islands, at what people familiar with the situation say was a loss. All told, Morgan Stanley put about $30 million into Enselco through loans, according to Igor Bobrov, who was hired in 2008 to be Enselco’s chief financial officer and later became its CEO. Hugh Fraser, a London-based Morgan Stanley spokesman, says bank officials declined to comment for this story.

Morgan Stanley’s failed gamble in Ukraine shows how Wall Street firms, in the last gasp of a debt-fueled bull market, strayed further from their traditional business of advising companies and underwriting stock sales to embrace diverse projects with unfamiliar risks.

The story is a great example of how Wall Street, enabled by its own creative debt instruments, pursued ever more speculative returns towards the end of the financial bubble. While conservatives continue to blame the Community Reinvestment Act, Fannie Mae and Freddie Mac for these types of shenanigans, Morgan Stanley's foray into Ukrainian farming shows that none of these were necessary. An under-regulated and over-leveraged Wall Street was quite capable of causing a financial disaster on its own, thank you.